The Virtuous Circle of Internal Corporate Reputation and Financial Performance

Abstract

Prior work suggests that employee views of corporate reputation can influence a firm's future financial performance and that previous financial performance can also influence employee views of reputation. What is not known is which is the greater effect, or whether the virtuous circle this implies might exist, particularly in smaller firms. The aim of this paper is to test the idea of a virtuous circle linking employee views of reputation (at two levels in the organization, senior managers and front-line employees) to firm performance. Data from a survey of employees in SME Spanish accounting audit firms were used to test a model derived from theory and prior work. We find that managers' and employees' views of reputation are each influenced by prior financial performance, employees more indirectly via the views of their managers. The influence of managers' views on those of employees was in turn significant. However, the influence of both on future performance was less significant, with the views of managers having the greater effect.